JOSHUA STEIN For information on the author, visit www.joshuastein.com. The author appreciates helpful
comments from James M. Carolan, of Steptoe & Johnson LLP; Kenneth M. Jacobson, of Katten Muchin Rosenman
LLP; Alfredo R. Lagamon, Jr., of Ernst & Young LLP; Donald H. Oppenheim, of Berkeley, CA; Alexa Klein, Deborah
Goldman, James Patalano, and Lauren Silk, of the author’s legal staff; and Robert G. Harvey, of the author’s editorial
staff. Blame only the author for any errors, omissions, politically incorrect opinions, or injudicious or hurtful comments.
The author reserves the right to assert positions inconsistent with this article, which is offered for discussion
only. To be notified of publication of the second edition of the author’s book on ground leases, or to submit
comments on this article, send email to [email protected] Copyright © 2018 Joshua Stein. An earlier version of this article appeared
in the ACREL Papers, Fall 2018 (New Orleans), published by ALI CLE.
This article will become part of the second edition of the author’s book on ground leases, expected to appear in 2019. Consistent with the
style of that book, this article capitalizes, without definition, many terms that any Lease would ordinarily define and capitalize. It is assumed
that readers know what those terms mean and can easily find or write suitable definitions, or ask the author for definitions. The book will
include a Model Lease template, sometimes mentioned in this article.
Whenever Landlord and Tenant negotiate a long-term
ground lease (a “Lease”), two major issues that come to
mind, after the rent, relate to protection of Leasehold
Mortgages and creation of a financeable Leasehold
Estate. As important as those issues are, though, the parties
also need to think about Fee Mortgages and how
they interact with the Lease.
Just like any Leasehold Estate, the Fee Estate needs to be
financeable. The ability to finance both the Fee Estate
and the Leasehold Estate, potentially to support more
debt than if a single party owned the entire Premises,
represents a fundamental reason to create Leases. Any
Lease should therefore include a limited set of Fee Mortgagee
protections. Those protections should recognize
that Fee Mortgagees have concerns that are similar to,
but narrower than, those of Leasehold Mortgagees.
This article looks at Fee Mortgage issues from five
1. Fee Mortgagee’s generic due diligence in reviewing
2. Fee Mortgagee’s other concerns;
3. Tenant’s concerns;
4. Landlord’s concerns; and
5. The interplay between a Fee Mortgage and rights
of first offer, first refusal, or some variation (“First
After summarizing Fee Mortgage issues considered from
those five perspectives, with some sample language in a
few cases, this article then offers a complete set of sample
provisions Landlord could add to a Lease to address
the Fee Mortgage concerns raised in this article.
Wherever this article offers sample language, italics indicate
noncrucial (or possibly “overkill”) provisions that
sometimes appear, but are not strictly essential.
FEE MORTGAGEE’S GENERIC DUE DILIGENCE
When a prospective Fee Mortgagee reviews a Lease for
a Loan to be secured by the Fee Estate, Fee Mortgagee
starts by asking some questions about the Lease, much
as a Landlord or prospective Landlord would:
• Will the Rent support the Fee Mortgage?
• Does the Lease shift all Premises-related obligations
and burdens to Tenant?
• Does Landlord have any residual risks or
• Can Tenant assert any offsets or reductions
• Does Tenant have any termination rights?
• Does the deal require a creditworthy Tenant or
Guarantor? If so, does the Lease adequately provide
FEE MORTGAGES IN GROUND LEASE TRANSACTIONS
(WITH MODEL LEASE LANGUAGE)
Reprinted from the November 2018 issue of ALI-CLE The Practical Real Estate Lawyer.
FEE MORTGAGES IN GROUND LEASE TRANSACTIONS (WITH MODEL LEASE LANGUAGE) | 21
that? And does the deal structure seek to assure
that any creditworthy party will stay creditworthy?
• Do the development-related provisions of the Lease
mitigate any risk of development failure?
• Do the insurance provisions make sense and
match Fee Mortgagee’s expectations?
• Does the Lease obligate Landlord to give Leasehold
Mortgagees or Subtenants any rights or protections
that could turn out to be burdensome,
such as an obligation to nondisturb a substantially
below-market or abusive Sublease?
Beyond the typical Landlord’s agenda in any Lease,
though, Fee Mortgagee will have a few additional concerns,
placing more weight than a typical Landlord on
some other concerns, because lenders worry more than
borrowers about some of those things. The following
due diligence checklist represents an idealized version
of what Fee Mortgagee would like to see in a Lease. To
the extent the Lease does not live up to that standard,
Fee Mortgagee will need to evaluate the risk and either
figure out a way to live with it (basis points can solve a
lot of problems), persuade Landlord to obtain (pay for)
a Lease amendment, or not make the Loan.
This due diligence checklist does not purport to be
exhaustive. It just touches some major bases, without
detail. This discussion disregards generic real estate
issues that would arise if the Lease did not exist at all
and are not affected by the existence of a Lease.
Does the Lease require that any Fee Mortgage contain
certain specified provisions? If so, Fee Mortgagee
will want to confirm it can live with those provisions.
Does the Lease require any notices or deliveries when
Landlord obtains a Fee Mortgage? As part of the Fee
Mortgage closing process, the Fee Mortgage should
include any required provisions and Fee Mortgagee
should give any required notices.
If Fee Mortgagee wants to maintain escrows for taxes
and insurance, can Landlord require Tenant to make
the required monthly escrow deposits? If not, Landlord
may find it needs to tie up cash to make Fee Mortgagee
Does the Lease limit Landlord’s liability to its interest
in the Fee Estate? In the worst case, if the Lease obligations
turn out to be untenable, Fee Mortgagee or
foreclosure purchaser would want the ability to terminate
any liability under the Lease. They might accomplish
that by somehow abandoning the Fee Estate and
the Lease, either by assigning them to an entity that is
judgment-proof and bankruptcy-remote or having an
express right to renounce any interest in the Fee Estate
and terminate liability. Given the allocation of responsibility
in any Lease, Fee Mortgagee will not worry as
much as Leasehold Mortgagee about these issues.
Although the notion of Lease abandonment makes
sense, it is not market standard.
Wherever the Lease requires Tenant to indemnify
Landlord, does that obligation also extend to Fee
Mortgagee and its affiliates, servicers, etc.?
Even if the insurance provisions in the Lease make sense
from a Landlord’s perspective, do they adequately consider
Fee Mortgagee’s interests and needs? If the Lease
does not require Tenant to give Fee Mortgagee the
benefit of a great insurance package required by the
Lease, then Fee Mortgagee will find it unsatisfactory.
Does the Lease impose on Landlord any obligations that
Fee Mortgagee might find unacceptable, or that a future
owner of the Fee Estate might be incapable of performing,
for example, any construction, particularly off-site?
Losses (Condemnation and Casualty)
Fee Mortgagee will want Landlord to have first claim to
any Condemnation Award, at least up to the Fee Mortgage
loan balance. Fee Mortgagee will also worry about
a panoply of other issues related to Losses, such as:
• Can Fee Mortgagee prevent an inadequate settlement
of a claim?
• Will a creditworthy party hold any Loss Proceeds
• Do the conditions to release of Loss Proceeds
22 | THE PRACTICAL REAL ESTATE LAWYER NOVEMBER 2018
• Can the Lease terminate because of a Loss?
• If so, will Fee Mortgagee be made whole?
• Can Leasehold Mortgagee or Tenant take the
money and run, rather than restore?
Can Fee Mortgagee determine with certainty which
Leasehold Mortgagees and Subtenants are entitled
to protections (notices, etc.) under the Lease? If Fee
Mortgagee forecloses, will Fee Mortgagee or Successor
Landlord be able to obtain that information? If all
such protected parties must record their rights, then
Fee Mortgagee won’t have a problem. If recordation
is not required, then this creates potential uncertainty
about who might come out of the woodwork after a
Occasionally, a Lease will allow Rent to drop at the time
of a land value Rent reset, if land values have dropped.
In most cases, however, the Rent can never go down
at any time during the Lease (a “Rent Ratchet”). Fee
Mortgagees like Rent Ratchets, because the possibility
of a reduction in Rent makes the Loan much harder
to underwrite reliably. Landlords feel the same way,
of course, but they may be more willing to trade that
issue away in exchange for something else, and more
optimistic and risk-tolerant than Fee Mortgagees.
Rent Resets and Disputes
Can Fee Mortgagee participate in any Rent reset process
or other dispute under the Lease? The outcome of
any such process or dispute could hurt Fee Mortgagee,
so Fee Mortgagee will not only want to know about it,
but also have the right to participate and potentially
approve any settlement. The Fee Mortgage can certainly
address all that, but Fee Mortgagee will take more
comfort if Fee Mortgagee’s rights appear in the Lease.
Does the Lease give Tenant so much flexibility on
assignment, subletting, use, or alterations that Tenant
might do something that Fee Mortgagee would find
troublesome? For example, Landlord might not care if
Tenant decided to construct a cannabis growing facility,
but Fee Mortgagee might very well care.
How does the Lease term dovetail with the maturity
date of the Loan? In the rare case where the Lease
term does not extend significantly beyond the Fee
Mortgage maturity date, how will Landlord and Fee
Mortgagee plan ahead to deal with Lease expiration?
Though Landlord may regard that as a great opportunity
to do something different with the Premises, Fee
Mortgagee will worry more about the loss of income.
FEE MORTGAGEE’S AGENDA, BEYOND LANDLORD’S
Beyond the need to carefully review and consider the
terms of the Lease, any prospective Fee Mortgagee will
need to consider some other issues, both within and
outside the Lease, that do not directly concern Landlord
at all. Of course, any Landlord that might want to
obtain a Fee Mortgage in the future, i.e., any Landlord,
will also worry about these things.
Cash Sweep to Lockbox
If Tenant suffers financial problems (such as excessive
vacancy in a ground-leased shopping center), Fee Mortgagee
may want the right to sweep all of Landlord’s
incoming cash. A very worried Fee Mortgagee might
even want Tenant to pay its Rent into a lockbox from
the outset, so Fee Mortgagee can both receive its debt
service payments before Landlord sees any cash and
have an early warning system for possible Tenant issues.
Of course, this extra protection comes with an administrative
burden and the likelihood of mistakes and confusion.
Does anything in the Lease interfere with or prevent
Fee Mortgagee from obtaining a lockbox?
When Fee Mortgagee closes its Loan, it will expect
to receive closing deliveries equivalent to some but
not all the closing deliveries required for a Leasehold
Mortgage. Fee Mortgagee should also think about any
guaranty, security deposit, prepaid Rent, letter of credit,
ancillary agreement, or other document that Landlord
received from Tenant, its affiliate, any Leasehold
Mortgagee, or a third party such as a hotel manager.
Fee Mortgagee’s collateral package should capture all
these items. For each, Fee Mortgagee should also think
about obtaining: (a) estoppel certificates and confirmations;
(b) comfort that Fee Mortgagee can control (prevent)
future amendments or waivers; and (c) comfort
that Fee Mortgagee can assign its rights with any sale
of its Fee Mortgage or the Fee Estate.
FEE MORTGAGES IN GROUND LEASE TRANSACTIONS (WITH MODEL LEASE LANGUAGE) | 23
Escrow for Insurance and Taxes
If Fee Mortgagee likes insurance and tax escrows, then
Fee Mortgagee will probably want to: (a) maintain such
an escrow if Leasehold Mortgagee does not; and (b)
know with certainty that any Leasehold Mortgagee’s
escrow will be properly applied, even if the Leasehold
Mortgage goes into default.
Fee Mortgage Transfer
If Fee Mortgagee decides to transfer its Fee Mortgage,
would anything in the Lease stand in the way, such
as unreasonable or discretionary restrictions on who
may hold a Fee Mortgage? Must Fee Mortgagee be an
“Institution” or fall within some other permitted universe
of Persons? How large is that universe? What’s an
“Institution”? Will any confidentiality restrictions in the
Lease impede Fee Mortgagee’s transfer? Will Fee Mortgagee
be able to obtain any Tenant (or other) estoppel
certificates it might need for such a transfer?
Fee Mortgagee Cure Rights
To preserve the Lease, Fee Mortgagee will want the right
to cure Landlord defaults. But those cure rights can be
simpler than Leasehold Mortgagee’s, for two reasons:
• First, any Landlord’s obligations are much simpler
and more limited than Tenant’s. Typically, Landlord
won’t have any significant obligations at all.
• Second, Landlord’s failure to perform its obligations
never creates a risk of total loss of Fee Mortgagee’s
collateral. At worst, Fee Mortgagee will
lose the Lease and Tenant and the stable Rent
income that the Lease produced. This might even
enhance the value of Fee Mortgagee’s collateral,
but a typical Fee Mortgagee prefers stable Rent
over drama. Still, Fee Mortgagee’s need for cure
rights and other protections is not as compelling
as Leasehold Mortgagee’s.
Fee Mortgagee Deliveries
Does the Lease require Landlord to obtain from Fee
Mortgagees any consent, subordination, nondisturbance
agreement (“SNDA”), Leasehold Mortgagee
protection agreement, or other future document that
might turn out to be undesirable?
Fee Mortgagee Protections after Foreclosure
If Fee Mortgagee forecloses, it may want protections
like those in a typical nondisturbance agreement with
a space tenant. For example, a foreclosing Fee Mortgagee
might want to be protected from any claims
Tenant might have had against Landlord before Landlord
lost the property to Fee Mortgagee through a
Foreclosure Transfer. Although space tenants often
live with such protections for a Landlord that acquires
a Fee Estate through a Foreclosure Transfer, a Tenant
under a ground lease will not necessarily accept such
a proposal in its entirety. Tenant and its Leasehold
Mortgagee may argue that the idea of protecting Fee
Mortgagees from Landlord’s incompetence, defaults,
or mistakes is inconsistent with the notion that the Fee
Mortgage is totally subordinate to the Lease and all of
Tenant’s claims under the Lease. On the other hand, a
Landlord typically has few obligations to Tenant. Hence,
the likelihood of Tenant claims against Landlord is quite
low. But even if it’s a low likelihood of a large problem,
Fee Mortgagee will want the right party to bear it.
Even if Tenant and Leasehold Mortgagee refuse to protect
Fee Mortgagee (after a Foreclosure Transfer) from
the consequences of Landlord’s defaults, they may
agree to protect Fee Mortgagee from only the “landlordtenant
conspiracy” category of nondisturbance issues.
For example, Fee Mortgagee will want comfort that
any amendment, waiver, or other impairment of the
Lease requires Fee Mortgagee consent and cannot
take effect without that consent. Fee Mortgagee will
worry if the Lease contains any obligation for Landlord
to agree to future amendments of the Lease made at
Tenant’s request or to accommodate a future Leasehold
Mortgagee. Fee Mortgagee will want the ability
to block any such amendments. Fee Mortgagee will
also worry about the possibility that Tenant will prepay
massive amounts of Rent (which will flow into the
pockets of Landlord’s principals instead of to future
scheduled Fee Mortgage payments) and then default
on the Fee Mortgage.1
If the Lease does not require Tenant to enter into an
agreement to protect Fee Mortgagee from these and
similar risks, this will create concern for any future
prospective Fee Mortgagee, and hence for Landlord.
Among other things, it may lead Fee Mortgagee to
demand tailored nonrecourse carveouts from a creditworthy
principal of Landlord.
24 | THE PRACTICAL REAL ESTATE LAWYER NOVEMBER 2018
Priority vs Ground Lease
One issue often raised should not concern Fee Mortgagee
at all: the proposition that the Lease will be
prior and senior to the Fee Mortgage. That is part of
the fundamental structure of any ground lease transaction.
Tenants and Leasehold Mortgagees will not
tolerate mere nondisturbance agreements from Fee
Mortgagees. And Fee Mortgagees should have no
objection to being subordinate to the Lease, because
the Lease creates the cash flow to service the Fee
Mortgage. In addition to requiring subordination language
in the Lease, a very worried Tenant may sometimes
want Fee Mortgagee to execute a recordable
Space Leases, Comparison With
If a Lease were a space lease, it would sometimes contain
express cure rights for Fee Mortgagee, but only of
a very limited nature. Similarly, if a space tenant entered
into an SNDA with Fee Mortgagee, it would typically
contain more Fee Mortgagee cure rights. Fee Mortgagees
generally live with those arrangements for ordinary
space leases. In the case of a ground lease, though, Fee
Mortgagees may care more about these issues. Instead
of relying on a collection of space tenants, Fee Mortgagee
relies almost totally on the rental stream from
just one Tenant, as well as Landlord’s rights against
that Tenant. In an extreme case with a highly creditworthy
Tenant (a so-called “Credit Tenant Lease”), Fee
Mortgagee may lend an unusually high amount (high
loan-to-value ratio) in reliance on the Lease. For these
and other reasons, Fee Mortgagees may have a higher
standard for the cure rights they want in a ground lease
than in a space lease. They will also start their analysis
from the proposition that Landlord should really have
no obligations at all. Anything inconsistent with that
proposition could be troublesome.
Tenant may want Fee Mortgagee to agree not to join in
any effort by Landlord or Landlord’s bankruptcy estate
to sell the Fee Estate free and clear of the Lease under
Bankruptcy Code Section 365 or any comparable process
in a Landlord Insolvency Proceeding.
Any Lease will typically require Landlord to deliver certain
documents for Tenants and Leasehold Mortgagee
in the future, including:
• Estoppel certificates;
• A New Lease if the Lease terminates;
• Consents (or joinders or subordinations) for future
easements and agreements;
• Building permit applications;
• Subtenant nondisturbance agreements;
• Consents to Subleases and Sublease amendments;
• A separate agreement with an overanxious Leasehold
Mortgagee to confirm the Leasehold Mortgagee
Protections already in the Lease.
In some cases, those documents will also require consents,
joinders, or subordinations from Fee Mortgagees.
Ideally, from Tenant’s perspective, the Lease will
require Landlord to obtain those documents. Landlord
may worry, however, that Fee Mortgagees will
not cooperate. Thus, Landlord will try to trim back
any Landlord obligation to obtain any Fee Mortgagee
signature to anything. Tenant will also want to avoid
finding it needs some document from (only) Landlord—
even a document the Lease requires Landlord
to deliver—but the Fee Mortgage says Landlord can’t
sign that document without Fee Mortgagee’s consent,
which is not obtainable. So both Landlord and Tenant
will want to assure that Fee Mortgagee has an obligation
to cooperate with anything the Lease requires
Landlord to deliver.
Identity of Fee Mortgagee
Tenant might consider whether to try to restrict who
may hold a Fee Mortgage, under the theory that some
Fee Mortgagees will more likely cause trouble than others.
As a separate concern, Tenant might not want to
see a Landlord affiliate act as Fee Mortgagee, at least
if that Fee Mortgagee wants any special cure rights or
other rights. These issues are not too different from
Landlord’s possible concern about who may act as a
Leasehold Mortgagee. Typically, however, Tenant will
not be able to negotiate meaningful restrictions on an
outright conveyance of the Fee Estate, so it makes little
FEE MORTGAGES IN GROUND LEASE TRANSACTIONS (WITH MODEL LEASE LANGUAGE) | 25
sense to restrict Fee Mortgagees. Moreover, if a Fee
Mortgage must always remain subordinate to the Lease,
this should help mitigate any concerns of Tenant. As a
practical matter, though, Landlord and Fee Mortgagee
will typically not tolerate giving Tenant any restrictions
on Fee Mortgagees or any meaningful remedy for violating
any restriction if granted. Tenant will have to live
with this problem and make sure the Lease adequately
protects Tenant regardless of the identity of Landlord.
In the rare case where Tenant negotiates restrictions on
the identity of Fee Mortgagees, what happens if Landlord
violates that restriction? Tenant would have trouble
proving damages. At a minimum, any prohibited Fee
Mortgagee should have no special rights in that capacity
against Tenant. In an extreme case, Tenant might
have the right to a partial Rent abatement or delayed
Rent increases. The mere possibility of such a remedy
could, however, impair financeability of the Fee Estate.
Alignment of Lease and Fee Mortgage
In closing any Fee Mortgage, Landlord will want the Lease
and the Fee Mortgage documents to work together
and not place Landlord in an impossible position. A few
examples of that proposition follow. All are variations on
the single idea that Leases and Fee Mortgages should
be aligned. Landlord should address that single idea in
the term sheet, letter of intent, application, or commitment
for the Fee Mortgage. Fee Mortgagee should have
no problem with any of these concepts once Fee Mortgagee
has reviewed and approved the Lease.
Documents and Deliveries
If the Lease requires Landlord to obtain any document
or delivery from Fee Mortgagees, Landlord will need to
assure that the Fee Mortgage requires Fee Mortgagee
to cooperate. Here is sample language:
To the extent the Lease requires Landlord to obtain
any document or delivery from its Fee Mortgagee, Fee
Mortgagee agrees to execute and deliver that document
or delivery, provided that: (x) it is reasonably satisfactory
to Fee Mortgagee or meets whatever standards
apply under the Lease; and (y) Tenant has met the conditions
precedent to require it under the Lease.
If the Lease requires specific insurance, Landlord will
not want the Fee Mortgage to require something different
or additional. If the Lease requires Tenant to pay
for and maintain suitable insurance, then the Fee Mortgage
should require Landlord to do nothing more than
enforce Tenant’s obligations. Landlord should have the
obligation to step in only if Tenant does not perform.
Here is sample language:
Lease Insurance Requirements
So long as (a) the Lease is still in effect and (b) Tenant
maintains in effect all insurance coverages the
Lease requires (subject to Fee Mortgagee’s reasonable
approval of the deductible amounts to the extent the
Lease gives Landlord that approval right), then Landlord’s
obligations to provide all insurance coverage this
Fee Mortgage requires shall be deemed satisfied. That
shall not excuse Landlord from the obligation to give
Fee Mortgagee evidence of that insurance coverage
for Fee Mortgagee’s benefit, to the extent of Landlord’s
right to obtain that evidence under the Lease. If
the Lease is not in effect or Tenant fails to maintain any
required insurance, then Landlord shall maintain insurance
as this Fee Mortgage requires. To the extent Landlord
maintains its own insurance, Landlord shall name Fee
Mortgagee as an additional insured or otherwise give Fee
Mortgagee the benefit of that insurance in a manner consistent
with ordinary insurance practices.
If the Lease makes Tenant wholly responsible for maintaining
the Premises and gives Tenant exclusive possession
of the Premises, Landlord will not want to have
any maintenance obligations beyond trying to get
Tenant to do what it said it would. More generally, Tenant
should perform all obligations related to the Property.
Landlord would not want its Fee Mortgagee to
require anything more from Landlord than Landlord
can require from Tenant. So long as Tenant performs,
Landlord should have no incremental obligations to
Fee Mortgagee. Here is simple language for the Fee
Mortgage, which should refer to anything involving
Property-related covenants or obligations, including
Casualty and Condemnation:
Notwithstanding anything else in any Loan Document,
so long as the Lease is in effect and Tenant is performing
26 | THE PRACTICAL REAL ESTATE LAWYER NOVEMBER 2018
its obligations on any matter related to management,
operation, repair, or maintenance of the Premises, or
relating to _____________, the Lease provisions on
those matters shall control. So long as the Lease has
not terminated, nothing in any Loan Document shall
require Landlord to take any actions regarding those
matters beyond what the Lease requires of Tenant.
Landlord may satisfy that obligation by diligently seeking
(short of litigation) to enforce Tenant’s obligation to take
any such actions. To the extent that and so long as Tenant
or any Leasehold Mortgagee has rights under the
Lease, those rights supersede all inconsistent provisions
in the Loan Documents. Notwithstanding anything
else in the Loan Documents, Landlord’s and Fee
Mortgagee’s rights and obligations on Casualty and
Condemnation shall be subject to the Lease provisions
on those matters, including adjustment, settlement,
holding, application, and disbursement of any insurance
proceeds or condemnation award.
Ideally, of course, the parties will adjust the requirements
of the Fee Mortgage so they align perfectly
with those of the Lease. Typical timing pressures of a
transaction, and the volume of paper involved, make
that difficult. Hence the need for language such as that
Tenant Rights; Landlord Consents
The Lease will often give Tenant broad rights to change
use, perform alterations, and sign Subleases. The Fee
Mortgage should not give Fee Mortgagee more control
over these matters than the Lease gives Landlord.
If the Lease gives Landlord consent rights, then Landlord
will often allow Fee Mortgagee to control those
consents—or at least some of them—but subject to
whatever standard (e.g., reasonableness) limits Landlord’s
exercise of its discretion. Here is sample language
Consents Under Lease
Landlord shall Notify Fee Mortgagee of any consents
requested of Landlord under the Lease. Tenant shall
obtain Lender’s approval to grant any such consent
before doing so, if the consent relates to ________.
In granting or withholding its approval, Fee Mortgagee
shall comply with any standard for consent that
applies to Landlord under the Lease. Fee Mortgagee
shall respond to a request for its consent within the
shorter of (a) __ days less than the response time that
applies to Landlord under the Lease; and (b) __ days
after submission to Fee Mortgagee. Landlord’s submission
to Fee Mortgagee may include a Conspicuous
statement that approval will be deemed granted if not
properly withheld within that time. If the submission
includes that statement, then Fee Mortgagee’s failure
to respond in that time shall be deemed approval.
Rights of Contest
The Lease will allow Tenant to contest mechanics’ liens,
Real Estate Taxes, Laws, and other matters. Landlord
cannot find itself in a situation where Tenant can contest
a matter under the Lease, but the Fee Mortgage
requires Landlord to perform that matter.
Representations and Warranties
To the extent Fee Mortgagee asks Landlord to make
representations and warranties on the Property, Landlord
should qualify those. If a particular matter, such as
legal compliance, is Tenant’s responsibility under the
Lease, Landlord can often only say that any statements
about it are accurate “to Landlord’s knowledge.” If Tenant
has total control of that matter, then any Landlord
assurances and covenants need to be “subject to Tenant’s
rights under the Lease.”
Fee Mortgagee may want Landlord to maintain
escrows for Real Estate Taxes and insurance. Landlord
will want to coordinate those with the Lease requirements.
With any luck, the Lease has Landlord-friendly
language suggested in this article. In that case, the
escrows simply need to be documented accordingly.
If the Lease contains no such language, Landlord may
need to persuade Fee Mortgagee not to worry about
escrows. Given the low loan-to-value ratio of Fee
Mortgage loans, Fee Mortgagee ought to be willing
to go along, but that discussion should take place very
early—preferably at the term sheet stage.
Fee Mortgagee will probably want the right to inspect
the Property. That right will need to be subject to
whatever constraints apply in the Lease. If the inspection
occurs during the pre-closing process, Landlord
may want to include this statement in the term sheet,
application, or similar document for the loan:
FEE MORTGAGES IN GROUND LEASE TRANSACTIONS (WITH MODEL LEASE LANGUAGE) | 27
Fee Mortgagee’s inspection of the Property must comply
with any requirements and limitations in the Lease.
Unless the inspection discloses Tenant is in material
default under the Lease (for example, Tenant is not
prosecuting _______ as the Lease requires), the Property
shall be deemed to have passed inspection.
The same themes arise in the context of reporting
requirements under the Fee Mortgage. Here is an example
of how Landlord might protect itself from having to
report information it does not have and cannot obtain:
As long as the Lease remains in effect, Landlord need
not give Fee Mortgage any property-level report, financial
statement, or rent roll that reflects any sublease or
Tenant’s results of operations, except to the extent the
Lease entitles Landlord (and Tenant gives Landlord)
that information. Landlord’s reporting shall be limited
to Landlord’s leased Fee Estate subject to the Lease.
If Landlord or its principals assume personal liability
for any “bad acts,” carve out anything done by Tenant,
such as Tenant’s theft of security deposits. The description
of carveouts should speak in the active voice, e.g.,
“If Landlord steals the security deposits,” as opposed
to “If any security deposits are misapplied.” Fee Mortgagee
may want to add carveouts for prohibited Lease
amendments and Rent prepayments. Landlord and its
principals should be willing to accept that.
General Statement on Alignment
In addition to the specific concerns and specific language
suggested above, Landlord may ask Fee Mortgagee
to include language like this in the Fee Mortgage,
though a conservative Fee Mortgagee may balk
at the contemplated level of generality and insist that
Landlord identify in detail each specific provision in
any Loan Document that causes concern:
Alignment with Lease
To the extent the Lease allows Tenant to do anything
without Landlord’s consent (e.g., alterations),
that action by Tenant shall not be deemed to violate
the Loan Documents. Any action the Lease requires
Landlord or Tenant to take (or allows Tenant to take
without Landlord’s consent) shall not be deemed to
violate or cause a default under any Loan Document.
Notwithstanding anything else in any Loan Document,
Landlord shall have no obligation to do anything that
would violate the Lease. Where the Loan Documents
require Landlord to cause Tenant to take some action
or make any payment, Landlord shall diligently seek
to cause Tenant to do so in a manner consistent with
the Lease. If Landlord fails in those efforts, that shall
not constitute a default under the Loan Documents
unless the failure continues for ___ days. Nothing in this
paragraph obligates Landlord to commence any litigation
against Tenant. Fee Mortgagee shall accept performance
of any obligation under the Loan Documents
by Tenant as if Landlord had performed it.
Fee Mortgage Closing Process
When Landlord contemplates obtaining a Fee Mortgage,
Landlord must plan ahead for the closing process.
From Landlord’s perspective, however, the most
important Fee Mortgage closing delivery doesn’t
occur at closing. It occurs instead when the Fee Mortgage
closing process begins. Fee Mortgagee needs to
review the Lease and approve it, with no demand for a
Lease amendment, a “clarification” from Tenant, or anything
else outside Landlord’s control or that the Lease
does not already require from Tenant.
Landlord should insist that any prospective Fee Mortgagee
have its counsel review the Lease and raise any
issues before the rest of the closing process begins.
Landlord will probably have to pay for that. Here is
sample language for the commitment letter:
Early Lease Approval
Landlord has submitted a copy of the Lease to Fee
Mortgagee. Fee Mortgagee shall review and approve
or disapprove it before undertaking any other preclosing,
due diligence, third party, or documentation
activities for the Fee Mortgage. Landlord has advised
Fee Mortgagee that Fee Mortgagee must either accept
or reject the Lease as is. Borrower will not obtain any
Lease amendment or “clarification.” If Fee Mortgagee
rejects the Lease, then Fee Mortgagee shall promptly
refund Landlord’s Deposit, less only Fee Mortgagee’s
actual reasonable attorneys’ fees to review the Lease.
If Fee Mortgagee’s counsel finds any issues, the parties
should deal with them before Landlord incurs
28 | THE PRACTICAL REAL ESTATE LAWYER NOVEMBER 2018
significant expense for anything else in the closing process.
In most cases, the prospective Fee Mortgagee will
thank its counsel for being diligent and then decide to
live with whatever issues counsel discovers. In some
cases, Landlord and Fee Mortgagee may use loan covenants
or nonrecourse carveouts to handle any concerns
identified by Fee Mortgagee’s counsel. That mechanism
may work for issues with the control of Landlord and its
guarantor, but not for any issues beyond their control.
In a tiny minority of cases, the issues in a Lease will be
so serious that Landlord will need to: (a) obtain (i.e.,
pay Tenant for) a Lease amendment; (b) find a different
lender with less diligent counsel; or (c) persuade this
Fee Mortgagee or the next one to accept the Lease
without resolution of the issue. In the author’s experience,
Landlord and a prospective Fee Mortgagee usually
agree to option (c) and life goes on without further
drama. If, however, the issue arises during the Loan
closing process, rather than as a gating issue before
the Loan closing process begins, then it can cause a
great deal of excitement and wasted time.
Landlords sometimes try to add language to Leases that
create protections for Fee Mortgagees going beyond
cure rights and other rights inspired by Leasehold Mortgagee
Protections and nondisturbance agreements.
More specifically, Landlord will try to look ahead to
future Fee Mortgagees and try to assure that the Lease
shifts any resulting risks to Tenant and protects Landlord
from the risk that Fee Mortgagee will want more than
the Lease contemplates Landlord will be able to obtain
from Tenant and deliver to Fee Mortgagee. Particularly
if Tenant believes all Fee Mortgages should under all circumstances
remain subordinate to the Lease (and any
inconsistencies between any Fee Mortgage and the
Lease should be resolved in favor of the Lease), Tenant
will probably not tolerate these proposed provisions.
In rare cases, however, they may make sense. For
example, if Landlord and Tenant are (and will remain)
related and the Lease is being created just to facilitate
Fee Mortgage financing, Tenant may be more willing
to roll over for future Fee Mortgages.
Here are some sample overly Landlord-friendly provisions
that an aggressive (or deluded) Landlord may want to add
to a Lease. These provisions should not be regarded as “recommended”
or “desirable.” To the contrary, they represent
the diametric opposite of the approach suggested in this
article, which is “market standard” in the author’s experience.
This language—based on language that someone
actually proposed to the author in a Lease transaction—
appears here only for reference purposes and as an inspiration
for creative writing in or about Leases.
Notwithstanding anything else in this Lease, for any
Fee Mortgage and Fee Mortgagee, present or future:
(a) the Fee Mortgage shall govern to the extent of any
conflict with the Lease; (b) if any Fee Mortgage or Fee
Mortgagee from time to time requires insurance coverage,
or imposes requirements on insurance coverage
(including scope of Insurance Documents) that
go beyond those of this Lease, those insurance and
insurance-related requirements shall also be deemed
to constitute Liability Insurance or Property Insurance,
as applicable, under this Lease; (c) Landlord shall have
no obligation, and Tenant shall have no right, to do
anything that would violate a Fee Mortgage or entitle
Fee Mortgagee to exercise any right or remedy under
a Fee Mortgage; and (d) if any Fee Mortgagee disapproves
any matter, including a Transfer of the Leasehold
Estate, based on whatever approval standards
apply under the Fee Mortgage, then Landlord may
withhold its approval to that matter. Nothing in this
paragraph obligates Tenant to make any payment except
to the extent this Lease would require Tenant to make that
payment if the Fee Mortgage did not exist.
Information for Fee Mortgagees
If Landlord may eventually obtain a Fee Mortgage (i.e.,
if Landlord is in the real estate business or might want
to sell the Fee Estate to someone in the real estate
business), Landlord will know that prospective Fee
Mortgagees will want information that Tenant controls—
both for initial Fee Mortgage underwriting and
closing and continuing over the life of the Fee Mortgage
loan. As a starting point, Landlord may want Tenant
to deliver an estoppel certificate like the one that
the Model Lease requires Landlord to sign for Tenant.
An actual or prospective Fee Mortgagee may also
want to know how Tenant is doing in its business
of subleasing and operating the Premises. Tenant’s
success or failure will, as a practical matter, determine
whether the Rent will be paid. Fee Mortgagee
assumes that payment of Rent is a good indicator for
likely payment of Fee Mortgage debt service. Thus,
Tenant’s financial performance becomes crucial to Fee
FEE MORTGAGES IN GROUND LEASE TRANSACTIONS (WITH MODEL LEASE LANGUAGE) | 29
Mortgagee’s underwriting, closing, and monitoring
of its Loan. For that reason, Leases sometimes require
Tenant to report financial information to actual or
prospective Fee Mortgagees, even if Landlord is not
entitled to receive that information. Whatever information
Tenant agrees to give Landlord should automatically
be deemed a “Confidential Delivery” or subject to
whatever confidentiality obligations apply in the Lease.
Those obligations should be built into the Lease rather
than contemplate execution of a separate confidentiality
agreement to be negotiated (fought over) later.
Tenant Acquisition of Fee Mortgage
In some cases, creative Tenants acquire their Landlords’
Fee Mortgages, and then use those Fee Mortgages as
mechanisms to torment Landlord. Landlord may want
to try to prevent that. A few comments on that risk:
Documentation on Transfer
Landlord can ask for a certificate and other documentation
if any Transfer of a Fee Mortgage occurs, but the
problems suggested above will remain.
If a Tenant Affiliate has set its mind on acquiring a Fee
Mortgage, then as a practical matter it can probably
find a way to do it regardless of what the Lease says.
Landlord will probably never be able to prove it happened.
For example, Tenant Affiliate could enter into a
total return swap with Fee Mortgagee, or one or more
option agreements coupled with appointment of a
Tenant Affiliate as servicer of the Fee Mortgage. Thus,
Landlord may just have to live with this risk and keep it
in mind when negotiating any Fee Mortgage.
Fee Mortgagee Reluctance
Fee Mortgagees will probably not agree to any restrictions
on Transfer of a Fee Mortgage. Therefore, the prohibitions
need to appear in the Lease, in the form of
restrictions on Tenant. Any such restrictions will cause
concern for Leasehold Mortgagees worried about the
possible need to cure unusual defaults.
Fee Mortgage Terms
In negotiating any Fee Mortgage, Landlord might try
to persuade Fee Mortgagee to agree not to transfer to
any Tenant Affiliate, or enter into any agreement with
any Tenant Affiliate about the Fee Mortgage.
As a back-door way to prevent most Tenants from
acquiring Fee Mortgages, Fee Mortgage might agree
to Transfer only to Institutions. As a compromise measure,
if a Fee Mortgage is Transferred to any Person
except an Institution, then some of its terms (or protections
for Fee Mortgagees in the Lease) might change
in ways that would make it harder for a Tenant-related
Fee Mortgagee to squeeze Landlord. Although this
sounds reasonable, Fee Mortgagee may hate the idea.
Moreover, a smart Tenant could readily figure out a
way around these restrictions.
Even if Fee Mortgagee agrees to any restrictions on
Transfers to Tenant or its Affiliate, Fee Mortgagee will
probably insist that the restrictions go away if an Event
of Default exists under the Fee Mortgage, which is the
only time when these issues matter. Ultimately Landlord
must negotiate the Fee Mortgage so it doesn’t
matter who holds the Fee Mortgage. Ideally, the terms
of the Fee Mortgage should be reasonable enough
that Landlord doesn’t care who holds it. As a practical
matter, however, most borrowers can’t achieve that.
In any Lease, Landlord will occasionally give Tenant a
First Right. Less often, Tenant will give Landlord one. Any
First Right, as well as any purchase option, raises a wide
panorama of fascinating issues and opportunities for
dispute. A handful of those issues and potential disputes
relate specifically to Fee Mortgages and are collected
here. They affect Landlord, Tenant, and Fee Mortgagee.
First Right Carveouts
A careful Fee Mortgagee (and hence Landlord) will
want to assure that any First Right does not apply to: (a)
Landlord’s grant of a Fee Mortgage; (b) any Fee Mortgage
Foreclosure Transfer; and perhaps (c) any transfers
of the Fee Estate occurring after any Fee Mortgage
Response to Carveouts
The suggestion in the previous paragraph will concern
any Tenant, if Tenant cares about its First Right.
In response, Tenant may request some protections
designed to reduce the risk of foreclosure. Every one of
these is reasonable, but probably none of them will fly:
30 | THE PRACTICAL REAL ESTATE LAWYER NOVEMBER 2018
Tenant may want to limit the amount that a Fee Mortgage
may secure, thus opening a new can of worms.
Tenant might also worry that certain types of financing
are more likely to lead to foreclosure than others.
Notice of Foreclosure
Tenant may try to require that Fee Mortgage must give
Tenant reasonable prior notice of any foreclosure auction,
including any adjournment, so Tenant can bid.
This proposal, though very logical, usually fails because
Landlord will recognize that it would terrify any prospective
Tenant may try to limit who may hold the Fee Mortgage,
under the theory that certain Fee Mortgagees
will behave better than others. See “Identity of Fee Mortgagee”
First Right Default
If Landlord exercises a First Right against Tenant, what
happens if Landlord defaults in its obligation to purchase
the Leasehold Estate? Fee Mortgagee will want
to assure that any such default cannot adversely affect
Fee Mortgagee. Tenant’s rights and remedies should
consist of keeping Landlord’s deposit under the Purchase
and Sale Agreement. The Lease should not
suggest that Fee Mortgagee might need to cure the
default. Fee Mortgagee would also be unhappy with
the prospect of litigation between Landlord and Tenant
over Landlord’s default. Thus, Fee Mortgagee may
want to require that if Landlord wants to exercise a First
Right, it must use a different entity for that purpose.
Interaction with Fee Mortgage
How does Tenant’s First Right interact with a Fee Mortgage?
Is there any possibility that Tenant might be
able to acquire the Fee Estate, free and clear of the Fee
Mortgage, without paying the entire Fee Mortgage? If
the First Right is in the Lease or otherwise prior to the
Fee Mortgage, then it would give Tenant the right to
acquire the Fee Estate at a particular price determined
through the First Right process. What happens if that
price falls short of the amount secured by the Fee
Mortgage? Tenant would probably prevail and acquire
the Fee Estate free of the Fee Mortgage, although Fee
Mortgagee would be entitled to the sales proceeds,
such as they were. Conversely, how would Landlord’s
default under Tenant’s First Right affect Fee Mortgagee?
Fee Mortgagee’s right to cure, in itself, doesn’t
necessarily solve a future problem if Landlord’s obligations
are too onerous. If a Lease contains any First
Right, Fee Mortgagee will worry about all these issues
and insist that the Lease offer adequate protection.
LEASE LANGUAGE ON FEE MORTGAGES
Based on the preceding suggestions, any Lease should
contain language that looks out for Landlord’s future
Fee Mortgagees. It should start by giving them protections
like those of Leasehold Mortgagees, though
not as extensive. But it also needs to consider some
other issues, not all of them obvious. This sample,
below, offers sample language to that effect. Footnote
offer some commentary, occasionally but not always
repeating any relevant comments earlier in this article.
The author consents to use of this sample language
in any Lease. An editable version is available from the
author. It will reflect any improvements since publication.
Priorities and Relationships of Estates
Landlord may grant any Fee Mortgage, but only if at the time Fee Mortgagee is an Institution.3 This Lease, the Leasehold
Estate, and any New Lease shall be prior and superior to all Fee Mortgages and the rights of all Fee Mortgagees.
4 That priority and superiority shall also extend to any amendments to this Lease made with Fee Mortgagee’s
consent.5 Nothing in a Fee Mortgage can change Landlord’s or Tenant’s rights or obligations under this Lease. Every
Fee Mortgage shall: (a) attach only to the Fee Estate and not the Leasehold Estate; (b) be, and state that it is, subject
and subordinate to this Lease and any New Lease; and (c) require Fee Mortgagee to join in, or subordinate to, any
Easements, Incentive Documents, SNDA, and other documents this Lease requires Landlord to sign, provided that
each such document is in ordinary and customary form, recorded (except in the case of any documents not customarily
recorded), and reasonably satisfactory to Fee Mortgagee.6
FEE MORTGAGES IN GROUND LEASE TRANSACTIONS (WITH MODEL LEASE LANGUAGE) | 31
Fee Mortgage Foreclosure
A Fee Mortgage Foreclosure Transfer shall: (a) not affect this Lease or the Leasehold Estate, which shall remain
encumbered by any Leasehold Mortgage; (b) impair no rights of Tenant or any Leasehold Mortgagee, New Tenant,
or Post-Foreclosure Tenant; and (c) Transfer only the Fee Estate and Landlord’s interest in and rights under this
Lease, subject to this Lease.7
No Modification of this Lease shall be effective unless consented to in writing by all Fee Mortgagees, Leasehold
Mortgagees, Landlord, and Tenant. A Foreclosure Transfer under any Leasehold Mortgage shall not impair the Fee
Estate or any Fee Mortgage, and shall Transfer only the Leasehold Estate and Tenant’s interest in and rights under
this Lease. The Fee Estate shall remain encumbered by the Fee Mortgage.
Notices and Defaults
If Tenant gives Landlord any Notice of any alleged default by Landlord that could entitle Tenant to terminate this Lease,
abate Rent, claim an offset, or claim a partial or total eviction, then: (a) Tenant shall simultaneously give a copy to each
Fee Mortgagee of which Tenant has received Notice; and (b) each Fee Mortgagee shall have the right, but no obligation,
to cure Landlord’s default within 30 days after Tenant gives that Notice. If Fee Mortgagee cannot reasonably
cure a nonmonetary Default within Fee Mortgagee’s cure period under the previous sentence, it shall have such
additional time as it reasonably needs so long as it prosecutes the cure with reasonable diligence and continuity. If
Fee Mortgagee cannot reasonably cure a default without possession, then Fee Mortgagee shall be entitled to any
additional time it reasonably needs to consummate a Foreclosure Transfer and obtain possession, but only so long
as Fee Mortgagee: (i) prosecutes its rights and remedies with reasonable diligence and continuity; and (ii) timely
exercises its cure rights for all other Defaults of which it has received Notice.
Multiple Fee Mortgagees
If at any time Tenant has received Notice of multiple Fee Mortgagees: (a) any consent by or Notice to Fee Mortgagee
refers to consent by or Notice to all Fee Mortgagees; (b) except under clause (a), the most Senior8 Fee Mortgagee
may exercise all rights of each Fee Mortgagee, to the exclusion of every junior Fee Mortgagee; and (c) to the
extent that the most Senior Fee Mortgagee declines to do so, any other Fee Mortgagee may exercise those rights,
in order of priority.
Notwithstanding anything else in this Lease, Fee Mortgagee or Successor Landlord may exercise its rights through
an Affiliate, assignee, designee, nominee, subsidiary, or other Person, acting in its own name or in Fee Mortgagee’s
or Successor Landlord’s name, provided that Fee Mortgagee or Successor Landlord confirms in writing (if requested) that
such Person is authorized to exercise those rights. Anyone acting under the previous sentence shall automatically have
the same protections, rights, and limitations of liability as a Fee Mortgagee.
Fee Mortgage Escrow
If a Fee Mortgagee requires an ordinary and customary escrow arrangement for Real Estate Taxes or insurance premiums,
Tenant shall make all deposits into that escrow as Fee Mortgagee requires, provided that Fee Mortgagee
agrees to timely release those deposits only to pay Real Estate Taxes or insurance premiums and not to pay any
Mortgage indebtedness or anything else, even if the Fee Mortgage is in default, so long as no Lease Abandonment
Every present and future Fee Mortgagee is an intended third-party beneficiary of this Article.
32 | THE PRACTICAL REAL ESTATE LAWYER NOVEMBER 2018
If a prospective Fee Mortgagee is an Institution that has executed and delivered to Tenant a confidentiality agreement
substantially in the form of Exhibit __ (a “Confidentiality Agreement”),11 then Tenant shall give that prospective
Fee Mortgagee these items (the “Confidential Fee Mortgagee Deliveries”) for underwriting and closing the Fee
Mortgage: (a) reasonable access to the Premises for inspection, subject to Subtenants’ rights and compliance with
Tenant’s reasonable instructions; (x) Tenant’s financial statements (balance sheet, income statement, and rent roll) for
the Building (but not those of any Guarantors)12 for the previous three fiscal years (which need not be prepared by a
certified public accountant unless one was otherwise engaged for that purpose) (“Tenant Financial Information”); (b)
copies of all13 Subleases then in effect; and (c) [________] [such other information and materials as the prospective
Fee Mortgagee reasonably requests]. After the closing of any such Fee Mortgage, if the Confidentiality Agreement
remains in effect and Fee Mortgagee remains an Institution, Tenant shall give Fee Mortgagee updated Financial Information
and copies of newly executed Subleases since Tenant’s last such delivery to that Fee Mortgagee, but only if
that Fee Mortgagee requests, up to once a year. Landlord shall reimburse all reasonable costs and expenses, including
Legal Costs and photocopying costs, but excluding staff time, that Tenant incurs in performing under this paragraph.
If this Lease contemplates Landlord may give any Notice to Tenant that would or could entitle or require Tenant to acquire
the Fee Estate or sell the Leasehold Estate, then no such Notice shall be effective unless it includes written consent by all Fee
If Landlord, or a trustee or debtor in possession acting for Landlord, purports to reject this Lease under 11 U.S.C. § 365(h)(1)
(A), then Tenant shall not exercise any 365 Termination Option without Fee Mortgagee’s written consent. By accepting its
Fee Mortgage, each Fee Mortgagee shall be deemed to have irrevocably agreed with Tenant not to initiate, consent to, or
support any Landlord’s Free and Clear Sale.15
Tenant Control of Fee Mortgagee
Tenant shall not, and shall not cause or permit any Tenant Affiliate to, directly or indirectly acquire any Fee Mortgage or
obtain any direct or indirect right to control or direct any Fee Mortgagee.16
Fee Mortgagee Contact Information
To the extent this Lease requires or permits Tenant to give any Notice to a Fee Mortgagee, Tenant may do so based on the
name and address most recently either: (a) placed of record before Tenant acquired the Leasehold Estate; or (b) thereafter
actually given to Tenant in compliance with this Lease. Tenant has no obligation to run a title search, except when it
acquires the Leasehold Estate, or to perform any investigation to determine any Fee Mortgagee’s then current name or
Dispute Resolution Proceedings
If Landlord or Tenant initiates any Dispute Resolution Proceeding, then the parties shall simultaneously Notify each Fee
Mortgagee. Fee Mortgagee may participate in those proceedings on Landlord’s behalf, or exercise any of Landlord’s rights
in those proceedings, in each case (at Fee Mortgagee’s option) to the exclusion of Landlord, but (as between Landlord and
Fee Mortgagee) subject to the Fee Mortgage loan documents. No settlement shall be effective without Fee Mortgagee’s
consent, unless Landlord simultaneously pays it and the claimant releases any claim against Fee Mortgagee. Nothing in
this paragraph limits Landlord’s rights against Tenant or Guarantor.
FEE MORTGAGES IN GROUND LEASE TRANSACTIONS (WITH MODEL LEASE LANGUAGE) | 33
If a Fee Mortgagee or its designee succeeds to the Fee Estate through a Foreclosure Transfer (a “Successor Landlord”), then
at Successor Landlord’s request, Tenant shall: (a) automatically attorn to and recognize Successor Landlord as Landlord;
and (b) promptly sign and deliver an attornment agreement as Successor Landlord reasonably requests but only if it is
reasonably acceptable to Tenant and consistent with this Lease and Successor Landlord assumes all existing undischarged,
and future, obligations of Landlord, subject to the Exculpation Clause. On any such attornment, this Lease shall continue as
a direct lease between Successor Landlord and Tenant on all the same terms. No Fee Mortgagee or Successor Landlord shall
ever have any liability under this Lease beyond its interest in this Lease and the Premises. That liability shall terminate if that
Successor Landlord assigns this Lease in accordance with its terms (and the assignee Landlord assumes those obligations).18
Successor Landlord Protections
Notwithstanding anything else in this paragraph, unless Successor Landlord is an Affiliate of the former Landlord, Successor
Landlord shall not be: (a) liable for any previous act or omission of Landlord, except to the extent it continues after attornment;
(b) subject to any Offset that Tenant could have claimed against Landlord before attornment; (c) bound by any
Modification made without consent by the Fee Mortgagee that initiated the Foreclosure Transfer19; (d) required to perform
any Construction that Landlord had agreed to perform; or (e) required to account for any security deposit, prepaid Fixed
Rent, or letter of credit of Tenant except any that Fee Mortgagee or Successor Landlord actually received.20 Successor Landlord
may at any time abandon its interest in the Fee Estate by Notice to Tenant. After any such abandonment Successor
Landlord shall have no further liability under this Lease.21
Tenant shall on request of any Fee Mortgagee or Successor Landlord, and Fee Mortgagee or Successor Landlord shall on
request of Tenant or a Leasehold Mortgagee, enter into an agreement in form and substance reasonably satisfactory to the
parties, confirming these Lease provisions: (a) the relationship and priorities between Tenant (and Leasehold Mortgagees)
and Fee Mortgagee; (b) the consequences of an attornment to Successor Landlord; (c) the protections for a Successor Landlord;
and (d) any amendment, waiver, or termination of that agreement requires Leasehold Mortgagee Consent.22 No such
agreement shall increase any party’s obligations, or decrease any party’s rights, without that party’s consent.
1 For a discussion of nondisturbance agreements, the risks
against which they might protect Fee Mortgage, and
how any Tenant might feel about those protections, see
Joshua Stein, “Needless Disturbances? Do Nondisturbance
Agreements Justify All the Time and Trouble?,” 37 ABA Real
Property, Probate and Trust Journal, Winter 2003, at 701;
“Report of Subcommittee on Nondisturbance Agreements,
with model Agreement” (Joshua Stein, subcommittee chair,
primary author), New York State Bar Association Real Property
Law Section Newsletter, Spring 1994, at 42; and Thomas
G. Homburger and Lawrence A. Eiben, “Who’s on First—
Protecting the Commercial Mortgage Lender,” 36 ABA Real
Property, Probate and Trust Journal 411 (2001).
2 Tenant will not always accept exemption (c). As a compromise
position, Landlord and Fee Mortgagee might limit the
exemption to future affiliate transfers or multiproperty
3 What happens if Fee Mortgagee later stops being an
Institution, such as if an Institution sells the Fee Mortgage
to an opportunistic investor? Tenant might want to deny
such an investor at least some Fee Mortgagee protections.
This language does not address that possibility, as a Fee
Mortgagee will typically not tolerate any implied or indirect
restrictions on transfer. Tenant should negotiate a Lease,
and Fee Mortgagee protections, that work right for Tenant
regardless of the identity of any Fee Mortgagee. That
argument would imply the Lease should allow anyone at all
to hold a Fee Mortgage. The language in the text represents a
4 The definition of Fee Mortgage should probably require any
Fee Mortgage to be recorded. Otherwise, a purchaser of the
Leasehold Estate has no way to know with certainty who is
entitled to protections. Tenant may want the definition of
Lease to include all future amendments. Absent a requirement
for Fee Mortgagee approval of each such amendment,
Tenant’s definition would make the Fee Estate unfinanceable,
because an amendment could, e.g., reduce the rent to $1 per
5 Tenant may propose that Fee Mortgagee must be
“reasonable” about consenting to Lease amendments. That
will typically be a non-starter for any Fee Mortgagee. Landlord
should categorically reject it.
6 This would include, for example, any SNDA that this Lease
requires Landlord to deliver to a Subtenant. Landlord may
object to the entire concept in this paragraph, and particularly
clause (c), as it may scare off at least some potential Fee
34 | THE PRACTICAL REAL ESTATE LAWYER NOVEMBER 2018
Mortgagees. But the requirement is reasonable. If Tenant has
negotiated some right against Landlord, Landlord should
not have the right to enter into a Fee Mortgage that could
frustrate Tenant’s exercise of that right. Fee Mortgagee will
reasonably want to be subject only to recorded SNDAs.
Tenant might want clause (c) to be automatic, i.e.: “(c) contain
Fee Mortgagee’s irrevocable consent and subordination to
any recorded document or agreement affecting the Premises
that this Lease requires Landlord to deliver to Tenant or at
Tenant’s request.” Automatic subordination would concern
a Fee Mortgagee, hence Landlord. So this model language
does not provide for it.
7 If Tenant has a First Right that a foreclosure might impair,
Tenant may want to limit the amount of Fee Mortgages,
e.g.: “No Fee Mortgage shall secure principal indebtedness,
including permitted future advances, that exceeds Maximum
Permitted Principal.” The Lease would define Maximum
Permitted Principal separately. Would it include prepayment
premiums? Unlimited default interest? One solution is to limit
the collateral for the mortgage to the asset—not a perfect
solution, but a regulated lender can’t overburden an asset
with debt except in default.
8 The Lease will define Seniority based on a current title report
from a licensed title insurance company.
9 The parties may prefer to include this language in the Lease
Section on Real Estate Taxes or insurance. Tenant will worry
that Leasehold Mortgagee will want to control this escrow.
That’s manageable, as long as Leasehold Mortgagees to
use it only for its intended purpose and not to repay any
10 This language might better belong in the Lease section on
11 Often any agreement requires the parties to enter into a
future Confidentiality Agreement as a condition to delivery
of confidential information. That approach just asks for
trouble. If there will be a Confidentiality Agreement, then
attach it as an exhibit. Landlord will want the confidentiality
agreement to be benign and simple, so as to not create issues
with (prospective) Fee Mortgagees. Among other things,
the Confidentiality Agreement should allow disclosure to
regulatory authorities. Leave out the words “indemnify,”
“damages,” and “injunction.” For confidentiality obligations
between Landlord and Tenant, it makes more sense to
include a short paragraph on confidentiality in the Lease, to
avoid any need for a separate confidentiality agreement. The
Model Lease does that.
12 The exclusion for Guarantors may not make sense if either:
(a) Tenant has not yet completed for Initial Development;
or (b) the Lease contemplates continuation of a meaningful
Guaranty for the Term.
13 For residential buildings, Tenant may resist providing copies
of all Subleases and may offer instead to provide a sample
Sublease and a rent roll.
14 This paragraph belongs in the Lease section on First Rights.
15 This paragraph is nonstandard but legitimate. The first
sentence seeks to protect Fee Mortgagee if a Landlord
bankruptcy occurs. The second seeks to protect Tenant.
16 This was a requirement of a recent absolute net lease with
a public REIT. Landlord would not want Tenant to hold or
control a Fee Mortgage, as this would give a strong Tenant
creative new ways to squeeze Landlord. As a practical matter,
however, Tenant can directly or indirectly acquire control of
any Fee Mortgage in a way that Landlord may never see or
be able to prove. Landlord may want to say that a violation
of this covenant results in termination of the Fee Mortgage in
question or some other draconian remedy, but that concept
probably represents overthinking by Landlord.
17 This paragraph makes a great deal of sense, and hardly seems
unreasonable. It does not, however, commonly appear in
18 Fee Mortgagee would also like the right to abandon the Fee
Estate, but that is not an established legal concept. Instead,
Fee Mortgagee might assign to a single purpose entity with
no other assets; have that entity assume the Lease; and allow
that entity to go out of business. Other mechanisms may also
present themselves. In addition to this paragraph negating
Fee Mortgagee’s personal liability under the Lease, the Lease
should contain a general provision stating that no principal,
member, partner, shareholder, or other owner of Landlord
will ever have any liability under the Lease. That issue goes
beyond Fee Mortgagees and Successor Landlords.
19 As noted above, Tenant may ask that Fee Mortgagee be
“reasonable” about Lease amendments, a proposition
Landlord should reject. Tenant might propose that any
Modification made without Fee Mortgagee’s consent should
still bind Landlord and Tenant, but go away upon a Foreclosure
Transfer. Though perhaps logical that proposition may cause
philosophical nuances and fear for a Fee Mortgagee.
20 The italicized language encapsulates the standard protections
a Fee Mortgagee would obtain in an SNDA with a space
tenant. Fee Mortgagee may not need these protections for
most ground leases, and will typically live without them
(except protection against unconsented Modifications),
because Landlord has few or no obligations.
21 This is not a standard concept. It is unclear how abandonment
22 Tenant or Fee Mortgagee may want such an agreement.
Leasehold Mortgagee might want a reciprocal agreement of
broader scope. Any such agreement would start out looking
like an SNDA for a space lease, except the subordination would
be reversed, nondisturbance would become irrelevant, and
attornment probably could occur by operation of law without
such an agreement. If anyone wants such an agreement, attach
an agreed form as an exhibit. It should include Leasehold
Mortgagee Protections (e.g., any amendment, cancellation,
or waiver requires Leasehold Mortgagee consent). Because it
goes beyond protection of Fee Mortgagees, the Lease might
better address it more generically in a section on future
deliveries and further assurances.